Charity begins at home for Forrest

It’s not just
Andrew Forrest
’s voice in the tax debate that makes politicians of all colours listen to him. When Opposition Leader
Tony Abbott
reached out to Forrest last week, it was to tap his expertise in helping indigenous workers. Forrest’s demonstrated commitment to indigenous employment makes him invaluable to whoever is in government. By standing near Forrest, politicians can say they are making a difference.

It’s a unique position. While the government provides funding for GenerationOne, the organisation’s website is owned by Forrest’s charity, the Australian Children’s Trust (ACT), which also supplies GenOne’s chief executive, the former national secretary of the Australian Labor Party, Tim Gartrell.

Forrest also actively supports the Australian Employment Covenant, another organisation promoting indigenous employment. While the federal government supported setting up the Covenant, its operating company, Australian Covenant, is a subsidiary of Forrest’s company Leaping Joey, as trustee for the ACT.

But it is in his philanthropic work where Forrest’s record is most open to interpretation. While it hasn’t been his intention, falling share prices and tax deductions have meant that most of his donations to his ACT charity have been paid for by taxpayers.

Forrest declined to comment on The Australian Financial Review’s findings. Senior accountants consulted by the AFR were supportive of the AFR’s methodology but stressed that it was very difficult to say with certainty what income or deduction outcomes eventuated from donations made in the past.

While Forrest has donated more than $90 million in assets to his ACT charity –the largest exercise in philanthropy in Australian history –the net personal cost to Forrest’s interests is probably less than $2 million.

How that remarkable outcome eventuated – and how Forrest became the compassionate face of Big Mining – is a saga that begins during a car ride to the Anaconda Resources office on May 31, 2001, the day that major shareholders Anglo American and Glencore forced him out of the struggling company he had founded seven years before.

“As I was driven into work I kept thinking about how I could make some good out of this disaster and this treachery," Forrest said in a 2007 statement tabled in his court battles with the Australian Taxation Office. “I decided I would try to raise $10 million to $12 million for charity . . . If Anglo, Glencore and Anaconda agreed, and if I could negotiate some protection for shareholders, my supporters and I would go peacefully."

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Under the deal Forrest struck that morning, Anaconda would pay his $3.5 million termination fee to the ACT, the private charity he and his wife Nicola would set up to promote indigenous welfare, while Glencore would pay another $3.5 million into a charity that Forrest would nominate.

It was a generous gesture, but one that would become controversial as the deal grew more complicated.

“In June or July 2001, Nicola and I . . . decided to donate 3.5 million of my shares to the ACT," he said in the statement, quoted in a Federal Court judgement last February. When they made the decision for a donation “I had not thought of selling any of my shares to the ACT".

That had changed by September. “Anaconda’s share price had fallen substantially from its high, and from the price I had bought some of my shares for," he said in the court statement. “I had borrowed substantial sums of money to buy shares in Anaconda . . . I was under financial pressure from my bank following the fall in the Anaconda share price."

It was logical to sell the shares to his new charity – Forrest said he believed the share price would recover, benefiting the ACT, and if he sold shares elsewhere “that publicity about me selling shares in Anaconda would adversely affect the market’s confidence in Anaconda".

The $3.5 million termination payment from Anaconda was paid into the bank account of ACT’s trustee company, Leaping Joey, on December 31, 2001. On January 15, 2002 Leaping Joey used the money to buy 4.1 million Anaconda shares in three parcels, from Andrew, from Andrew and Nicola, and from the family’s Minderoo Trust.

But the donations weren’t over. Forrest’s company Metals Group gave the ACT another 2.9 million Anaconda shares for free.

It was a remarkable gesture, but Forrest had his critics. What made it controversial was that the ACT bought the shares for 85¢, when the closing price on market was 74¢. Then the share price dived. Five weeks after the deal, Anaconda announced a $457 million loss. By June 30, when the full-year loss hit $919 million, the share price was 30¢.

Forrest had given his charity trust $5.6 million in cash and shares. But by June 30 it was only worth $2.1 million.

That’s still more than most people will ever give away. But how much did it cost Forrest? It’s always easy to be harsh in hindsight. Forrest didn’t know what was going to happen to the share price when he made his gifts.

What can be said is that even with the donations, the Forrest family interests ended up with cash and tax deductions worth $4.2 million. (It would be less if there was capital gains tax on the share sale, but Forrest testified he bought shares for more than the 85¢ sale price).

In fact, if you compare the Forrest family finances after they had made the donations with where they would be if they had given nothing, after the tax break and the share price disaster it looks like they ended up less than $270,000 poorer for their generosity.

The ACT charity was up $2.1 million, but most of that was thanks to taxpayers.

Unhappily, the ATO took the view that this was a scheme to avoid tax. By 2007 Forrest was challenging this, unsuccessfully, in the Administrative Appeals Tribunal. Last February, the full Federal Court overturned an ATO ruling on interest payments by the Winderoo Trust, but confirmed that Forrest should pay tax on his termination payment from Anaconda, though it said this was a mistake for which he should not be penalised.

By June 2007, Forrest had a much bigger tax worry. It had begun happily enough when Forrest agreed to help restructure an ailing mining company, which he renamed
Poseidon Nickel
. A grateful Poseidon Nickel board agreed in April 2007 to grant Forrest 115 million options.

They were exercisable at 40¢, but would only vest when the share price reached various levels up to $1. With the shares at 49¢ it seemed reasonably pitched.

The Forrest magic proved strong for the Poseidon share price. By July 2, when shareholders approved the options for Forrest that the company then granted, the shares had jumped to $2.14. The option package was worth $200 million.

That produced an instant tax problem. Forrest’s options would give him 39 per cent of the company if exercised. “If options will provide more than 5 per cent of the company when exercised, tax on them cannot be deferred," says Gary Fitton, a director of Remuneration Strategies Group in Melbourne.

It would produce a catastrophic tax bill for Forrest if the options ever reached him. But they never did.

The Poseidon board granted the shares on July 2, 2007, wrote off the cost of them at that date in the accounts under a Black-Scholes valuation of $226.8 million, but delayed issuing them to Forrest.

One of the factors that had fuelled the surging Poseidon share price was a marketing agreement with
Fortescue Metals
. In August 2007, Poseidon announced that the marketing deal with Fortescue was off.

The shares headed south. By September 19, 2007 they were down to 77.5¢, when Forrest called a hasty press conference in the Fortescue offices. He announced he was making a huge charitable donation. The board had finally issued the options, which Forrest had instructed should be credited directly to his charity, the ACT.

With the falling share price the value of the options had dropped to $43.1 million –which meant they were still a tax problem. If the options had been issued to a Forrest company, it would have triggered a tax bill of at least $12.9 million at a company tax rate.

By electing to give the options to his charity, Forrest had saved himself a large tax bill. Just over a year later, Poseidon shares dropped below the 40¢ exercise price –they were worth nothing to the charity, though Forrest didn’t know this would be the result when he made the gift.

But the options were not the only donation Forrest announced on September 19, 2007. His family trust, the Peepingee Trust, gave the ACT 1 million Fortescue shares with a current value of $42.6 million.

By any standards this was hugely generous, particularly as the share price continued to soar.

Then the global financial crisis kicked in.

A year after Forrest donated the shares, they were worth only $26.8 million –and they would fall much further before they recovered.

While a trust pays no tax, its beneficiaries do. The donation by Forrest’s Peepingee Trust would have produced a $42.6 million tax deduction for its beneficiaries. At a 30 per cent tax rate, the tax benefit would come to $12.8 million.

Again, any view is coloured by hindsight. What can be said is that at the time of the press conference in September 2007, the ACT had received gifts worth $85 million. A year later the value had fallen to $26.8 million.

Forrest in return was freed from a tax bill on the options; in addition, his family trust could pass on tax benefits. The combined gain from these two tax savings came to $25.7 million.

What do these numbers mean? The Forrest family interests had made an $85 million donation, but in the long term, after tax benefits and falling share prices, the net cost of making that donation was just $1.1 million.

The ACT did indeed receive a huge donation, but the bulk of the wealth given to the ACT to spend on indigenous welfare was paid for by taxpayers.

This is not what Forrest intended. He had no notion that the financial crisis would savage the value of his gifts. It was merely good fortune on his part.

“The tax system is structured in a deliberate fashion to encourage private philanthropy that benefits the wider community, so it is not unusual for donors to benefit from tax breaks on the money they put into trusts that are established for that purpose," says Yasser El-Ansary, tax counsel for the Institute of Chartered Accountants.

In general comments about the tax system, El-Ansary says: “There is clear need for private donors to step in and contribute to those who are disadvantaged in some way. Using the tax system to encourage that behaviour is effective, as long as the rules are not abused through the use of contrived and deliberate schemes that are established to avoid tax . . . Whilst ever the tax laws are complex and piecemeal, the use of planning strategies to minimise tax will continue to be a type of financial sport for some people in the community."

The tax system needs to become more transparent so taxpayers have a clearer understanding of the rules that apply to benevolent causes, El-Ansary says.

Meanwhile, some of the first results of Forrest’s charity work show his skills at leveraging. In February 2008, Western Australia’s then health minister, Jim McGinty, announced a $3 million program to increase family and community health services in Fitzroy Crossing.

Forrest had convinced James Packer to donate $500,000 for the project. Another $330,000 came from federal government funds with $1.7 million assistance from the state government. Forrest himself kicked in the rest with a $500,000 contribution. It came from the ACT.